The Hidden Cost of Volatility

Don't be a victim of crowd psychology by buying stocks based on tips from your brother-in-law or because a stock is reputed to be a "good company." These are not plans or methods, but rather gambling. For the skilled trader, there are tools that can help avoid emotional and financial extremes experienced by the herd.

Steel Your Emotions

Act on reliable signals and discipline yourself to follow your rules. Crowds are often wrong, and being a follower in the markets usually leads to losses. This is harder than it appears because human beings are social animals, but exercising self-discipline can move ahead of the curve. Successful trading requires independence.

Trend vs. Consensus

Trends give signs of exhaustion before the larger trading community takes notice. Recent issues have shown that trends can be followed by an explosive rally with strong and decisive price action. The volume for a trend day should start above average, as well as higher than the previous day's volume.

Critical Thinking

A critical thinking approach is essential in understanding stock market direction. A 10-Year Backtest Reveals... - This article provides insight into how to use statistical studies of the market going back almost 100 years to spot the bottom in the general market.

Understanding FTDs

The Follow Through Day (FTD) method uses a combination of price action combined with volume to spot the bottom in the general market. At some point in the decline of the general market, it will attempt to rally. A rally attempt begins when a major market average closes higher after a decline that happened either earlier in the day or during the previous session.

Portfolio Implications

What does this mean for portfolios? Be specific. This method should give the feeling of an explosive rally with what appears to be strong and decisive price action. The volume for a trend day should begin above average, as well as higher than the previous day's volume. An FTD should also give the feeling of an explosive rally.

Conclusion

That said, this method requires discipline to follow through on. A successful trader needs to understand that trends can be followed by a huge gain of at least 1% on heavy volume. The most powerful FTDs occur within four to seven days after the attempted rally, and they should give the feeling of strong and decisive price action.